The Biggest Story of 2018: Will the Apartment Bubble Burst?

During 2017, we chattered extensively about the number of new rental high rises going up downtown.

But new apartments were also being built in mid-rise buildings throughout the city. Some neighborhoods welcomed the investments, but others, like Logan Square, actually protested the construction of these expensive, luxury apartments.

And now, despite reassurance from developers that there is plenty of demand, there appears to be an apartment glut, with several new mega-buildings yet to be completed.

Over the next 3 years, over 13,000 apartments are expected to come on the market downtown, 46% over the absorption rate.

We’ve chattered before as to what this will mean for tenants.

Already, landlords are offering at least 2 months free plus other “perks” such as free parking, free cable packages and even gift cards to furniture stores.

Yet, construction isn’t slowing down, as Crain’s reported in December.

Another construction crane is about to rise in the Fulton Market District after a local developer secured financing for a 263-unit apartment project on the neighborhood’s west end.

Marquette plans to break ground Jan. 8 on the 14-story building at the southwest corner of Lake and Ada streets, said Marquette President Darren Sloniger. It’s one of several residential projects in the works in the Fulton Market area, one of the hottest neighborhoods in Chicago, punctuated by the arrival of McDonald’s headquarters there next year.

Apartment developers like Naperville-based Marquette are counting on job growth—McDonald’s is moving about 2,000 employees there next year—to drive demand for housing. Unlike other parts of downtown Chicago, which are overbuilt, Sloniger said Fulton Market doesn’t have enough apartments to satisfy the strong demand there, one reason he’s confident Marquette will be able to fill up its new apartment building.

“It’s more supply constrained,” he said of the neighborhood.

But several other developers have the same idea, meaning that supply could catch up with demand in the next few years. Developers have rolled out plans for more than 2,000 apartments in the broader Fulton Market neighborhood, including a 300-unit tower at Peoria and Randolph streets. Of course, there’s no guarantee that all the developers will obtain construction financing, a task that has grown more difficult as construction costs have risen and the downtown market has swelled with thousands of new apartments.

“It’s tough to get deals done,” Sloniger said.

Will the building spree finally halt in 2018?

And will we ever see some of these apartment buildings convert into condos?

 

23 Responses to “The Biggest Story of 2018: Will the Apartment Bubble Burst?”

  1. As the article points out, Construction loans are tightening up so I’d expect to see a significant slowdown in new projects overall

    You’re bemoaning the absorption rate, yet constantly hype up the fact that Chicago is Hot Hot Hot with professional Millennials and everybody wants to move into the city. 4k/year doesnt seem to outlandish (Depending on the definition of downtown market) to support all the hip millennials and Big10 grads moving to Chicago.

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  2. Crains reported very strong apartment absorption in the first three months of 2017. A record if I recall. Just not enough to fully absorb the new units.

    New starts will definitely slow down in my opinion.

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  3. My prediction: The deals will get done, with a budget line item for lower than proforma lease-up rents (i.e. capitalize the negative NOI during lease up), but when the deal is stabilized, the problem will be STILL lower-than-proforma rents.

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  4. you can’t really have an apartment bubble can you?

    I mean big whoop a few investors get burned and a LLC gets poofed but other than more affordable housing competition, whats the big deal?

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  5. I personally think the impact of the tax bill on real estate is the biggest story of 2018 but whatever.

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  6. “I personally think the impact of the tax bill on real estate is the biggest story of 2018 but whatever.”

    What impact? That rich people aren’t going to buy houses? The middle class will mostly still be able to deduct it.

    Remember when everyone said Illinois raising its income taxes and business taxes over the last 2 years would mean that all these people and companies would flee to Indiana or Wisconsin or Texas?

    It never happened.

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  7. “4k/year doesnt seem to outlandish (Depending on the definition of downtown market) to support all the hip millennials and Big10 grads moving to Chicago.”

    There simply aren’t this many people moving to Chicago, of any age, unless we get Amazon and it looks to hire its initial 1,000 to 2,000 workers from outside of the city (and not just steal them from other companies, which is what most believe will happen. In that case, they’re already living here and won’t need housing.)

    You’re assuming they’re all 22. They’re not. Plenty of 40 somethings moving here too. They’re not Millennials. And they all don’t rent in downtown high rises.

    We can absorb the apartments if they halt most new construction but it will take a few years. In the meantime, I’d be surprised if some of the buildings weren’t converted into condos.

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  8. There simply aren’t this many people moving to Chicago, of any age, unless we get Amazon and it looks to hire its initial 1,000 to 2,000 workers from outside of the city (and not just steal them from other companies, which is what most believe will happen. In that case, they’re already living here and won’t need housing.)

    So other companies won’t hire anyone to replace those workers?

    So on one hand you state all the smart folks are moving to the city and now there aren’t 4K educated people moving to Chicago

    Good job playing both sides of the fence

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  9. “I personally think the impact of the tax bill on real estate is the biggest story of 2018 but whatever”

    Things never heard at a real estate closing…

    Buyer stating:

    “It’s not my favorite property but I’m buying that house because of the great deduction I’ll get from the high property taxes”

    or

    “If not for the tax implications I’d never be able to afford this condo”

    Reality check is that the high tax properties are already struggling. Look at the McMansions in Lake county and the north shore burbs. They were already struggling with or without a tax break on “part” of the carrying costs of owning that home. If you are trying to sell one of those properties then I’d agree that it is the biggest story of the year. Otherwise it is mostly business as usual and not that big of a deal.

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  10. “Remember when everyone said Illinois raising its income taxes and business taxes over the last 2 years would mean that all these people and companies would flee to Indiana or Wisconsin or Texas? It never happened.”

    Except it did as is ongoing just not in the city as much. The Loop gained some HQs and relocation of high profile companies but the long, long tail of manufacturing plants, tool and die, plastics, chemicals…the boring old economy stuff that employed hundreds of thousands with solid middle class jobs, continues to close up shop in Illinois and migrate elsewhere. Peoria, Decatur, South Suburbs, Rockford, Quad Cities, this is where Illinois is getting crushed and it is holding back Chicago’s growth imho.

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  11. As the fourth biggest story of 2018, I’ll nominate: which, if any, of Chicago’s proposed mega-developments will actually break ground?

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  12. “As the fourth biggest story of 2018, I’ll nominate: which, if any, of Chicago’s proposed mega-developments will actually break ground?”

    Good question. I was surprised the Riverline broke ground, to be honest. But it’s going up pretty quickly now. If the economy stays hot and they can find some banks to lend, then they’ll do it. Banks are still lending to build in Fulton Market. Another new apartment building just announced for that neighborhood just a week ago.

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  13. “The Loop gained some HQs and relocation of high profile companies but the long, long tail of manufacturing plants, tool and die, plastics, chemicals…the boring old economy stuff that employed hundreds of thousands with solid middle class jobs, continues to close up shop in Illinois and migrate elsewhere.”

    Who?

    Please cite an example of a 40 year old chemical company that has up and left for somewhere else. The tool and die manufacturers in the suburbs haven’t left. They’re hiring and trying to train students at local high schools to take those jobs.

    Have manufacturing jobs left Chicago in the last few years? Sure. But they’re either closing (no business) or moving to the land of the really cheap wages: Mexico. Or, in the case of one factory up in Wisconsin, they’re going to Canada (got a great incentive package.)

    In case you haven’t noticed, manufacturing is just 10% of the US economy now. It makes sense that the Chicagoland area is transitioning into the information and business services type of jobs that are the future.

    The recent release of record high numbers working downtown tells you where the economy is going.

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  14. “So other companies won’t hire anyone to replace those workers?”

    Amazon needs a 1 million+ city because it will steal those initial 1,000-2,000 hires from local companies. It needs plenty of other companies already here to do so. The other companies will have a really hard time of it if that happens. It’s difficult to get people to move cross country now. There’s little city to city mobility. It’s possible money will talk but it’s likely many companies will just promote from within and then hire the same college grads they always would have.

    Whomever wins it- we’ll see what happens. The cities better watch out what they wish for, because it might not turn out to be a positive to whomever wins. Amazon has distorted the Seattle job market so dramatically they HAVE to have a second headquarters. There is simply no one there to hire and they have thousands of job openings.

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  15. “Amazon has distorted the Seattle job market so dramatically they HAVE to have a second headquarters.”

    This is my concern. Any metro area of <2mil would be utterly culturally destroyed and dominated by Amazon.

    There are only a hand full of north american metros that make sense for Amazon: Dallas, Chicago, DC, NY, Atlanta, and Toronto. And of those, only NY and DC wouldn't be immediately, noticeably impacted on day 1.

    I understand the value of having all your HQ people under one roof, but for a company of that size, from a hiring point of view, I imagine it would be better to have 10 10,000 person "HQ"'s than 2 50,000 person HQs.

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  16. “This is my concern. Any metro area of <2mil would be utterly culturally destroyed and dominated by Amazon."

    This is my concern too Fred. I don't think the cities are really understanding but they need to talk to government and other company bigwigs in Seattle to see what is going on there.

    They had to rent buses to take the 2,000 summer interns to work every day because they overwhelmed the local public transit (going from the U Washington dorms to their jobs.) Seattle isn't that big of a city but Amazon has taken over, even more so than Microsoft or Starbucks ever did which is saying something.

    It's a great success story, but, yeah, they want to do the same thing with HQ2.

    I agree that DC and NY wouldn't notice their arrival. But DC would notice 50,000 of them eventually. Only NY and LA would be able to easily absorb that. That's why I'm surprised Boston was originally on their short list. I can't even imagine them finding housing for all those people there. And they wanted somewhere with cheaper housing, so they could offer lower salaries, but that's certainly not Boston.

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  17. They had to rent buses to take the 2,000 summer interns to work every day because they overwhelmed the local public transit (going from the U Washington dorms to their jobs.)

    Bit of exaggeration there Sabrina.

    https://www.seattletimes.com/seattle-news/transportation/the-amazon-effect-metro-adds-buses-to-handle-hundreds-of-summer-interns/

    Many of them took the bus and the city responded by adding more capacity. I heard this same story from the other perspective from friends who live in the area and were affected by the increase in usage. The solution was to get up earlier and catch the bus before the crowds hit. Somewhat akin to driving in on the Kennedy Expy each morning, if I need to be downtown at a specific time I get up earlier and make sure that congestion does not make me late.

    Actually it’s partly due to the nature of college kids these days. They need to be catered to and everything has to be done for them. Mommy and daddy were still tying their shoes and changing their diapers the day they were dropped off as Freshman. And now they expect their bosses and future employers to do the same.

    While I don’t doubt that the Seattle public transportation infrastructure is less than stellar they made adjustments as needed. The issues is that millennial heavy employers would have likely rented buses in Chicago NYC or DC as well. They are part of that same mentaility of doing everything like parents and have the resources and dollars to make it happen.

    Otherwise Brittany and Jake and their intern friends just needed to leave 30 minutes earlier to catch a bus that still had capacity. Just like knowing that today my morning drive would top an hour just like it did prior to December 26th.

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  18. Bit of exaggeration there Sabrina.

    1 paragraph later…

    Mommy and daddy were still tying their shoes and changing their diapers the day they were dropped off as Freshman.

    Cast out the beam of thine own eye, etc. etc.

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  19. Haaaaa….. got me Madeline! They actually stopped using laces when they started wearing Crocs, OluKai, and other slip on shoes. No time to deal with laces while texting and sending all those im’s or facebook posts.

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  20. But it does not change the fact that Amazon had to supply buses for those precious summer interns that otherwise would have had to get up a bit earlier in order to make it to work on time. Sad sad commentary on the laziness of American youth.

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  21. “Sad sad commentary on the laziness of American youth.”

    While they are lazy, the bigger issue for many is any reasoning skill and expecting to be catered to Vs solving the problem

    https://www.youtube.com/watch?v=fJIjoE27F-Q

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  22. Should be “Lack of” any

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  23. Haaaa…. that is funny! And I’d agree but now I sound like all the old guys when I was first coming into the workforce. They all thought that we were the end of civilization as they knew it at the time.

    And somehow it all worked out. Or maybe not depending on who you ask….

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